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Econ 101: How Free Traders Distort "Comparative Advantage"

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Alan Blinder has a very interesting op-ed in the Sunday Washington Post about "free" trade and job outsourcing. He has been attacked lately for being an economist who is actually pointing out that "free" trade may not be the perfect thing its fundamentalist proponents have been saying it is. Yet, Blinder still falls prey to one of the most insidious distortions that rationalizes "free" trade orthodoxy: the distortion surrounding "comparative advantage." Blinder, invoking "comparative advantage," writes:

"The basic principles of free trade that Adam Smith and David Ricardo taught us two centuries ago remain valid today: Just like people, nations benefit by specializing in the tasks they do best and trading with other nations for the rest."

But here's the problem -- Ricardo's "comparative advantage," which when it works does bring on beneficial specialization, isn't what's going on most of the time with "free" trade today. Let's turn it over to U.S. Sen. Byron Dorgan (D-ND) to explain exactly what I mean, because this is really a critical point. In his book Take This Job and Ship It, Dorgan explains what the theory of "comparative advantage" is:

"Time and time again, companies decide that they can move their jobs to Mexico, China, Indonesia, or other countries to save costs and boost profits...Economist say it is just something called 'comparative advantage' in action [and cite] the theory developed by David Ricardo in 1815 [who] used an example of trade between England and Portugal...The English-Portugese example described a natural comparative advantage each has with respect to the raising of sheep and the growing of grapes. It has to do with the climate and the soil, etc."

Then Dorgan shows how this is exactly what isn't going on today:

"Let's look at the way trade is today...Say a Chinese manufacturing company sells the toys it produces to a U.S. retailier. While there is an advantage to producing toys in China, it is not a 'comparative advantage.' Governments create the advantage. One allows its labor force to be exploited for low wages. The other turns a blind eye as jobs are sucked from its workforce. It is not some natural "comparative" advantage. It is a manipulated trade advantage...[When] the Chinese government decides it is okay for children to work, or for workers to be put in unsafe workplaces, or for companies to pollute the air and water, or to fire or jail those who try to start a union, those are political decisions made by a government. Yes, they can create an economic advantage. But it is not a natural comparative advantage. Manufacturing is less expensive in China precisely because workers are exploited...When the political system of a country creates the artificial advantage for gain, say, through repressed labor rights, it has nothing to do with Ricardo's theory. And yet economists continue to connect it to Ricardo's theory."

I want to repeat: THIS IS AN ABSOLUTELY FUNDAMENTAL POINT TO UNDERSTAND because "comparative advantage" is the entire basis for all the rationales spewed by today's "free" trade fundamentalists. All of their arguments for job outsourcing and against labor/human rights/environmental protections lead back to the idea that today's version of "free" trade rewards "comparative advantage" when in fact, as Dorgan so eloquently explains, it rewards manipulated/artificial advantages that create races to the bottom.

The fact is, those pushing for basic labor, human rights and environmental standards are the ones most interested in respecting Ricardo's theory of "comparative advantage." If global trade had basic standards, then we would be closer to a situation where natural advantages (soil, geography, minerals, etc.) or even human-supported positive investments (education, infrastructure, etc.) would create real comparative advantages, rather than today's situation where artificial negative problems (bad labor, environmental, or human rights protections) create manipulated advantages.